Exempt goods and procedural lapse: duty cannot arise from breach of movement rules, and penalty fails with departmental approval.

Exempt hank yarn cleared under Rule 96E could not be subjected to central excise duty merely because it was not brought back to the factory, since procedural non-compliance with the movement requirement did not convert exempt goods into dutiable goods. The yarn remained covered by Notification No. 6/2000, and the absence of a specific requirement in Rule 96E to return the processed yarn before clearance meant that duty could not be fastened only on breach of procedure. Penalty was also unsustainable because the removals were undertaken with departmental permission. The duty demand and penalty were therefore set aside in favour of the assessee.

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Issues: Whether exempted hank yarn cleared under Rule 96E could be subjected to central excise duty merely because it was not brought back to the factory, and whether penalty could be sustained when the removal was undertaken with departmental permission.

Analysis: The hank yarn was admittedly exempt from duty under Notification No. 6/2000 dated 01.03.2000. Rule 96E did not expressly require the processed yarn to be brought back to the factory before clearance, and non-compliance with the procedure for movement of goods did not convert exempt goods into dutiable goods. A procedural infraction could not by itself create a duty liability where the final product remained exempt. Since the removals were made with the department's approval, the basis for penalty also failed.

Conclusion: The demand of duty and the penalty were unsustainable and were set aside in favour of the assessee.

Final Conclusion: Exempt goods could not be taxed solely for breach of the movement procedure, and no penalty survived where the clearances had been made with departmental permission.

Ratio Decidendi: Procedural non-compliance with a removal rule does not create duty liability on goods that are otherwise exempt, and penalty cannot be imposed when the action was undertaken with departmental approval.

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